Nationalisation and Privatisation

This topic is about nationalisation and privatisation as forms of government microeconomic intervention in the market.Meaning
Nationalisation is generally defined as the act of government taking property previously owned by individuals or other legal entities (eg:- companies or municipalities) into the ownership of the state. This is often done to safeguard the supply of an important good or service.
Privatisation is the opposite of nationalisation. It is the transfer of ownership of property or businesses from the government to a privately owned entity (individuals or companies).

Reasons for nationalisation

Natural Monopoly – Many key industries nationalised were natural monopolies. This means the most efficient number of firms is one. If a natural monopoly is a private entity, it can exploit the consumers. Therefore, to avoid inequalities of wealth that can arise due to natural monopolies, such industries can be nationalised.

Welfare of the people – Some industries play a key role in the welfare of people. Government provision can ensure that needy groups can be looked after and provided with basic necessities.

Positive externalities – Goods which are considered as merit goods give positive externalities. To ensure that the population has access to such merit goods with affordable price, the government can nationalise firms providing these goods and services.

Substitute for Welfare – When major industries, particularly those employing large number of people, become bankrupt there is often a demand that the industry concerned should be taken over by the government.

Reasons for privatisation

Efficiency – It is possible that private firms are usually more efficient as they have incentive to cut costs to employ better production and management methods, in order to make more profit.Revenue to the government – the government can raise revenue by selling off the state owned companies. The company will continue to provide the good or service it had been providing. The government can also then take tax from the privatised firm.Increased competition – more firms mean greater competition and efficiency.Reduced political interference – Government firms are always affected by the political interference from the government. A government may be short-sighted as it may only be focusing on the next election. Privatisation can overcome this problem.